Gold fell almost 2 percent on Tuesday to its lowest price since August, hit by heavy technical selling and growing hopes that U.S. legislators are closer to reaching a deal that would avert a fiscal crisis next month.
Bullion posted its biggest one-day drop since Nov. 2. Analysts said that gold is at a turning point held by technical support at its 200-day moving average and a multi-year rising trendline near $1,660 an ounce.
"If gold is not able to defend those key supports, one should expect a new wave of technical selling to continue," said Adam Sarhan, chief executive of Sarhan Capital.
Spot gold was down 1.9 percent at $1,666.90 an ounce.
Earlier in the session, bullion hit $1,661.01, a 3-1/2 month low for the weakest price since Aug. 31. However, further losses appeared to be limited for now as it rebounded off its 200-day moving average.
On charts, Tuesday's drop sent spot gold's relative strength index (RSI) to 33, near an area below 30 which is traditionally seen as oversold territory.
U.S. gold futures settled down $27.50 at $1,670.70, with volume in line to near its 30-day average, preliminary Reuters data showed.
Gold, a traditional inflation hedge, had been pressured by worries that a failure of U.S. legislators and President Barack Obama to clinch a deal to avert the so-called fiscal cliff of automatic tax hikes and spending cuts starting in January would send the U.S. economy back into a recession.
The price of bullion is down in 9 out of the past 11 weeks.
Gold prices are also on track to drop 6 percent for the quarter to match their worst quarterly performance since the third quarter of 2008 at the height of the global economic crisis, marked by the bankruptcy filing of Lehman Brothers.
The metal tumbled as a deal in Washington looked closer as House of Representatives Speaker John Boehner kept the support of his Republican colleagues for compromises in talks with the White House.
U.S. equities and crude oil rallied on the news.
Silver dropped 2.4 percent to $31. 49 an ounce.
The gold market was particularly choppy as gaps appear to remain between Democrats and Republicans.
The White House rejected Boehner's backup proposal, saying it fails to meet Obama's call for a balanced approach and does not put enough of a tax burden on the wealthiest Americans.
Boehner's concession last week to consider higher tax rates on the wealthiest Americans — an idea long fought by his party — signaled that a deal was possible before a year-end deadline.
"You are seeing more confidence in the stock market on hopes that they are getting very close to getting a deal done, and that's why some of these assets which are defensive in times of uncertainty are selling off," said Phillip Streible, senior commodities broker at futures brokerage R.J. O'Brien.